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May 2, 2014

It has been a while since U.S. telecom companies first got up in pay TV's business. But recent stirrings on the merger front show the industries are drawing ever closer. In the latest example, AT&T reached out to DirecTV about a possible acquisition of the satellite-TV operator, The Wall Street Journal reported. Together, in video the two companies would rival the scale of a combined Comcast and Time Warner Cable, should a proposed deal between those two receive regulatory approval. Indeed, Comcast's merger effort may have spurred AT&T to act, seemingly abandoning ambitions of expanding into Europe. AT&T's courting of DirecTV also comes against a backdrop of mounting competition—and possible consolidation—in the wireless industry along with the dual promises of wireless broadband and cable-Wi-Fi-enabled phone networks. Tying up with AT&T could make sense for DirecTV, whose subscriber-growth rate has fallen year over year since 2010. As a satellite provider, DirecTV lacks its own broadband offering, which puts it at a disadvantage to cable peers.

AT&T's fiber broadband could fill that gap. For AT&T, buying DirecTV would give it access to the satellite company's free-cash flow. That could be valuable, as roughly 85% of AT&T's free cash flow is expected to go toward its dividend in 2014. And doubling down on video would make AT&T less exposed to wireless at a time when aggressive promotions by T-Mobile US have been shaking up the industry. But buying DirecTV, which has an enterprise value of $59.5 billion, would hardly solve all of AT&T's problems. AT&T would be tying itself to a business in structural, if gradual, decline. Doing a deal also would mean passing up the opportunity to buy the satellite-TV company that also comes with a sizable swath of wireless spectrum: Dish Network.

Getting Dish to the bargaining table may, in fact, be AT&T's primary goal in talking to DirecTV. Indeed, Dish shares rose more than those of DirecTV Thursday. Reports in March that Dish had approached DirecTV about a deal were viewed by some investors as Dish trying to flush out a buyer such as AT&T or Verizon Communications. The talks with DirecTV could be AT&T's way of returning the favor, essentially trying to spook Dish into lowering its price ambitions by threatening to buy its satellite rival. Price would be a major hurdle to an AT&T bid for Dish. Charlie Ergen, the latter's chairman, controls the company and is likely to demand a significant premium. AT&T's latest move probably won't change that. Still, with Dish, AT&T would get its hands on airwaves that it might otherwise have to buy at auction later on. It also would be keeping Dish's spectrum out of the hands of Verizon, which is focused on paying down debt from its acquisition of the rest of Verizon Wireless. Granted, a deal with DirecTV might be simpler from a regulatory standpoint than with Dish due to the spectrum component. But the Federal Communications Commission will likely raise spectrum-ownership limits in a vote on May 15, easing the path for AT&T. And, while not a slam dunk, an AT&T satellite deal would likely face less regulatory scrutiny than a possible Sprint bid for T-Mobile, according to Guggenheim Partners. Comcast's bid for Time Warner Cable also could pave the way for AT&T because the telecom company would look smaller from a video-subscriber perspective by comparison. AT&T may not end up tying the knot with either satellite player. But the telecom and pay-TV industries are likely to get more entangled.

Wall Street Journal

Federal Communications Commission Chairman Tom Wheeler strongly defended his support for a new set of rules overseeing high-speed Internet access that critics fear would give preferential treatment to big companies and wealthy consumers. Wheeler's proposal is intended to pave the way for Internet providers to strike deals with companies such as Netflix and Amazon to accommodate their traffic without pushing others to a slow lane. The agency said it would require Internet service providers to act in a "commercially reasonable manner" and all pacts for faster content delivery would be reviewed by the FCC.

The possible creation of an express lane has critics concerned that consumers will ultimately end up footing the bill for these so-called tolls. There are also concerns that customers that can't afford to pay for speedier delivery will be left on the side of the Internet highway. Wheeler argued that would not be the case. "We will not allow some companies to force Internet users into a slow lane so that others with special privileges can have superior service," Wheeler said Wednesday in remarks at the National Cable & Telecommunications Assn''s annual convention in Los Angeles. And if that appears to be happening, Wheeler said, the FCC will act fast. "Let me be clear. If someone acts to divide the Internet between 'haves' and 'have-nots,' we will use every power at our disposal to stop it," Wheeler said.

That could include labeling Internet service providers under Title II of the Communications Act, and tightening federal regulations on them. That approach would mean stricter oversight as broadband providers would be treated as common carriers, which is how phone and utility companies are regulated. Such a move would probably face strong challenges from broadband providers as well as lawmakers who are wary of heavy regulation of the Internet. Wheeler's willingness to consider Title II with regards to open Internet rules was praised by Public Knowledge, which has been very critical of Wheeler's previous proposals. "We're pleased to see the chairman recognize Title II as a legitimate option for going forward with strong net neutrality rules," said Michael Weinberg, a vice president at Public Knowledge. "We are also encouraged to hear him reiterate his opposition to fast lanes on the Internet, and his recognition that all Americans deserve access to 'broadly available, fast and robust' Web experiences."

But other media watchdogs did not have their concerns eased by Wheeler's tough talk and argue that a Title II approach should be a promise, not a threat. "The future of the open Internet can't rest on the supposed good intentions of one chairman. Internet users and innovators need the certainty that comes with common carriage, not Wheeler's 'just trust me' approach to stopping harmful behavior from providers," said Craig Aaron, president of Free Press. The FCC is expected to vote May 15 to start the formal process of considering Wheeler's proposed net neutrality rules. That process includes soliciting public comments. The agency hopes to have new open Internet guidelines in place by the end of the year.

The regulatory agency's previous efforts to establish net neutrality rules have been tossed twice by courts. Wheeler said he is determined to craft a plan that will survive the courts without harming the public interest. "As chairman of the FCC, I do not intend to allow innovation to be strangled by the manipulation of the most important network of our time, the Internet," he said, adding that the agency will use "every power at our disposal to stop it." After Wheeler's remarks, former FCC Chairman Michael Powell, who is now chief executive of the National Cable & Telecommunications Assn., said the cable industry "has come to believe that an open Internet is a critical part of broadly available reliable service." "You can count on us as a constructive partner," Powell said to Wheeler.

Los Angeles Times

The world has become a tougher place for DirecTV since 2010, when AT&T Inc. unsuccessfully tried to buy the satellite-TV operator. After years of outperforming the rest of the pay-TV industry, subscriber growth has slowed sharply while programming costs are rising and cheap online video alternatives are multiplying. In response to changing market conditions, DirecTV's satellite-TV rival Dish Network Corp. has invested billions of dollars in trying to diversify into wireless broadband and launch its own online-video service. DirecTV, in contrast, has bought back stock—lots of it. The company has spent $29.7 billion on repurchases in the past eight years, according to regulatory filings. DirecTV has taken some steps to develop online-video services but it isn't as advanced as Dish, which hopes to offer its service beginning this summer, people familiar with the matter say. DirecTV's strategic position is in the spotlight now that AT&T has come back with yet another approach, as The Wall Street Journal reported late Wednesday. DirecTV stock rose 4% on the report, lifting its market capitalization—and rough purchase price—to $41.1 billion. A person close to the situation says DirecTV, which became independent in late 2009 when its then-biggest shareholder Liberty Media Corp. divested its stake, is likely open to a sale. The company's board, say people familiar with the situation, is concerned with satellite TV's Achilles' heel: its inability to offer an Internet-access broadband service competitive with the packages delivered by cable and phone companies.

While the biggest cable and phone companies offer broadband speeds of up to 500 megabits a second, with some planning gigabit-per-second services, technological differences mean that satellite companies typically offer no more than 10-15 megabits a second. That means even if DirecTV rolls out an online-video service, its customers would likely be using broadband supplied by rival cable or phone companies. DirecTV's board is worried about the possibility that cable and phone companies could raise the price of broadband connections, disadvantaging DirecTV as an online-video alternative, one of the people said. Crystallizing these concerns is Comcast Corp.'s $45 billion agreement to buy Time Warner Cable Inc., a merger that would create a broadband gargantuan. DirecTV CEO Mike White has said the Comcast-TWC deal would create "unprecedented media concentration in one company." It isn't clear whether regulators would allow a second pay-TV merger if the Comcast-Time Warner Cable clears antitrust hurdles. On a combined basis, AT&T and DirecTV would have nearly as many television customers as Comcast—about 26 million, compared with close to 30 million for Comcast, after some planned divestitures.

A person familiar with the Federal Communications Commission's thinking predicted an AT&T-DirecTV deal would have a solid chance at approval because offering video or voice service alone is viewed as a dying business and the combined company would be in a position to compete with Comcast, the leading cable and broadband provider. AT&T wouldn't solve DirecTV's competitive disadvantage in broadband but it would make it less of an issue. AT&T sees satellite TV as a more efficient way to deliver live television than its wired network, say people familiar with AT&T's thinking. A purchase of DirecTV would allow AT&T to use its wired network for fast broadband and video-on-demand services. For DirecTV's Mr. White, who joined the company in 2010 from PepsiCo Inc., selling would resolve a strategic quandary. Looking to diversify, the company has pondered various acquisitions over the past several years, including online-video service Hulu LLC, wireless spectrum, Latin American telecom operator GVT and even Netflix Inc. and Time Warner Inc., says a person familiar with DirecTV's thinking.

While some proceeded—such as a bid for Hulu—none of these came to fruition. Mr. White has repeatedly expressed his skepticism of Dish's plans to enter the wireless business, noting that the economics don't make sense. As Dish bought up wireless airwaves, DirecTV ran a trial of wireless broadband technology with Verizon Communications Inc. but abandoned the effort. Meanwhile, the pay-TV market was getting more competitive. During Mr. White's tenure, DirecTV's rate of subscriber growth has fallen every year. Mr. White wasn't available for an interview, DirecTV said. Mr. White has emerged as a vocal critic of rising programming costs, a big issue for pay TV, but DirecTV has had limited success fighting back. In 2012 Viacom Inc.'s channels, including MTV and Nickelodeon, were blacked out on DirecTV in a fight over fees and online availability of Viacom programming. After nine days, during which DirecTV lost subscribers, the two sides settled. Earlier this year the Weather Channel was blacked out for several months on DirecTV, which wanted to reduce what it was paying for the service but eventually backed down.

DirecTV still hasn't renewed a long-standing agreement to carry National Football League games on its Sunday Ticket feature, a marquee exclusive that expires at the end of the next NFL season. The companies have been wrangling over digital rights, as DirecTV has been asking for greater flexibility to offer the product online and packaged with the new, slimmed-down Internet-based video offerings, people familiar with the matter said. Mr. White has said he is confident the two sides can strike an exclusive deal. DirecTV has invested in cloud infrastructure for a streaming video but its efforts have moved in fits and starts. DirecTV reached a deal with one major programmer, Univision Communications, for its streaming service. But plans for niche streaming services catering to different consumer groups such as Hispanics, children and international audiences have been delayed and may not launch until the first quarter of next year, says a person familiar with the situation.

Dish has been moving more aggressively, reaching an agreement earlier this year to carry Walt Disney Co.-owned channels on an online-video service it hopes to launch soon. Media executives say they are more bullish on Dish launching online video this year. Dish has the framework for such a service since it already offers a cheap, streaming package with international programming called DishWorld today. Veteran satellite analyst Jimmy Schaeffler says the different pace at which DirecTV and Dish have moved in online video reflect differences in corporate culture. Dish Network Chairman Charlie Ergen "is something of an exclusive icon in the telecom industry in that he has a huge amount of power to make decisions that his peers don't, being the major shareholder" of Dish. "DirecTV is a completely different kind of company in that they've got more hoops to jump through to get something done. The bureaucracy and traditional culture that goes with the company through the decades makes it a more challenging environment to move ahead and get things done."